What Are Payroll Liabilities? + How to Calculate Them

The people you hire become some of your best assets. However, wages and employment costs are often one of your biggest expense categories too. So, keeping track of how much money it costs to pay your employees is essential. 

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But how do you keep track of upcoming payroll expenses?

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The answer lies in an accounting category called liabilities—specifically, payroll liabilities. 

What Are Payroll Liabilities?

Payroll liabilities are all payroll-related expenses you haven’t paid yet. They can include employee wages, withholdings, employer taxes, and the cost of payroll software.

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In contrast, payroll expenses refer to the payroll-related costs you’ve already paid. To put it another way, your liabilities are the payroll costs you still owe; after you’ve paid them, they become expenses.

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This is the accounting way of tracking what you owe versus what you’ve paid. Differentiating between paid and unpaid costs helps you understand how much cash you need on hand to pay for expenses.

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When you run payroll, your current payroll liabilities convert into expenses. Then, they build up again during the pay period as your employees clock in their hours. Your payroll liability account grows until you run payroll and the cycle begins again. 

Are Payroll Liabilities Bad?

Ultimately, payroll liabilities aren’t bad and don’t mean you’re accumulating debt. They pop up continuously as you track one of your most significant expenses: paying your employees.

How Do You Record Payroll Liabilities?

If you prepare a balance sheet for your business, you’ll record payroll liabilities as wages payable and taxes payable under current liabilities. Current liabilities include your short-term expenses, which you expect to pay off in 12 months or less. 

Types of Liabilities Associated with Payroll

Now that you’re familiar with the cycle of payroll liabilities and expenses, let's look at the different costs you can track.

Employee Wages and PTO

Unpaid employee wages make up the largest part of your pay-related liabilities. If you hire hourly employees, this amount can change each pay period based on how many hours each employee works. 

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However, if you have only salaried employees, your payroll expenses will be more predictable. Money paid to employees as part of a PTO plan also counts as a payroll liability.

Tax Withholding

When you issue employee paychecks, you need to withhold two types of taxes: payroll and income. These are known as your payroll tax liabilities.

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Payroll taxes are paid for by the employer, such as the employer’s share of Medicare and Social Security tax set up by the Federal Insurance Contributions Act, or FICA. 

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In contrast, income taxes are paid for by the employee. But instead of your employee making direct tax payments to the IRS, you, as the employer, withhold those taxes from their gross pay each period and deposit them with the IRS. 

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Here’s a list of tax withholdings that go into the payroll liability account:

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• Federal Income Tax: These are taxes you withhold from your employees' net pay and send to the IRS on their behalf. The IRS offers a Federal Tax Withholding Estimator you can use to figure out the best rate based on your employee’s salary.
• State and Local Income Tax: Some states and localities also impose an income tax on employees, which is withheld from their paychecks.‍
• Social Security and Medicare Tax (FICA): This is a shared tax liability. Employers and employees each pay their half, which is 6.2% for Social Security and 1.45% for Medicare. The employee’s half is withheld from their wages each pay period. Use Form 941 to report and file with the IRS.‍
• Federal Unemployment Tax (FUTA): This tax is fully paid for by employers and helps fund government unemployment programs. Use Form 940 to report and file with the IRS. The FUTA tax rate is 6.0% on the first $7,000 you pay your employee during the year.‍
• State Unemployment Tax/SUTA: In some states, employers have to pay an unemployment tax on their employees’ pay. This helps fund state unemployment programs. You can look up your state’s unemployment tax requirements here.
• Workers' Comp Premiums: Your total payroll amount determines how much you have to pay for workers’ comp insurance, so it is also considered a payroll liability.‍
• Wage Garnishment: The federal government may ask you to withhold a portion of an employee’s wages to ensure they pay for a debt, such as child support. This is a legal procedure, and if you’re required to garnish an employee’s wages, you’ll receive a court order with specific instructions. 

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Keeping up with payroll tax laws can be confusing and time-consuming. You can make tax withholding easier by using software like Hourly. It automatically processes payroll and pays your taxes and workers’ comp premiums.

Voluntary Contributions

Now that you’re familiar with the different types of withholdings required by the government, let's look at some voluntary payroll deductions you might have to manage.

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• Health care payments: If you offer employer-sponsored health insurance, you may need to withhold health care plan payments from an employee’s salary. You may also have to pay the employer portion of their health care premiums. Both of these payments are payroll-related costs and are considered liabilities before you pay them.
• Retirement plans: These include employee and employer contributions to retirement plans, like a 401(k).
• Union dues: If you have employees that are union members, they may choose to have their dues withheld from their paycheck. That means you’ll need to deduct their dues from their total pay and send them to the union on behalf of the employee.

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Put simply, anything you need to withhold from an employee’s check and deposit elsewhere is considered a payroll liability until you deposit it. After you’ve paid it, it gets recorded as a payroll expense in your books.

Costs To Run Payroll

Finally, besides wages and withholdings, you should also consider the costs of managing or running payroll. These include fees to a payroll-service provider or the cost of any software you use to process payroll.

How To Calculate Your Payroll Liability

To calculate your total payroll liability amount, all you have to do is add up your current payroll-related costs that haven’t been paid yet. 

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Let’s look at a simple example where you are a small business owner with one employee named Sara, who earns $8,000 in gross pay weekly.

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Here’s what's included on Sara's pay stub.

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As you can see, her pay includes the withholdings for her federal and state income tax, state disability tax, and her half of FICA taxes.

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While she’ll only take home $624.97 of employee pay, you still pay the $800. You’re just sending parts of her total salary to the IRS as part of your required tax withholdings. 

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Besides the $800, you’ll have to pay the following payroll-related costs: 

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• Employer’s portion of FICA payroll tax expense: $61.20
• Monthly subscription for payroll software: $50
• Workers’ comp premium: $36 dollars per month (or $9 per week, which we'll use here since we're looking at weekly figures)

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To get your total weekly payroll liability, add up all the costs you need to pay. In this case, it will look like this: 

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Total Payroll Liability = Sara’s Gross Paycheck + Your Payroll Taxes (FICA) + Payroll Software + Workers’ Comp Premium

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Total Payroll Liability = $800 + $61.20 + $50 + $9 = $920.20

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Your total payroll liability is $920.20. Once you pay for all the liabilities (Sara’s wages, tax deposits, and software service fee), these costs convert to expenses.

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Now, this is a simple example where you only have one employee, and she doesn’t have any voluntary deductions, such as health care plan contributions. But recording payroll liabilities gets more complicated as you grow, hire new people, and offer more benefits. 

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That’s why we recommend using Hourly to keep track of your payroll obligations for multiple employees so you can save time and avoid errors.

Payroll Liabilities Made Simple 

To keep your business running, you need to have enough money to pay employee wages and cover employment costs, such as payroll taxes. That’s why business accounting includes the liabilities category. It’s a valuable tool that shows you your upcoming expenses.

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Now that you understand the difference between payroll liabilities and expenses, keeping track of both will be much easier. If you want to streamline your payroll management even further, explore Hourly payroll software. We simplify payroll by automatically filing payroll taxes and managing workers’ comp costs.